It makes perfect sense that most people in the top 0.1% are associated with the financial and banking industries if you know how banks work. Banks, and the Federal Reserve, create new money. They give this money to themselves, and then loan it out. This is as bad as, and effectively equivalent to, counterfeiting. Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth. It merely changes the distribution of the purchasing power of the money away from most people who have the money and to the people who get the new money. This is where the wealth of the top 0.1% comes from. Freshly printed money. It is a terrible system. The people with the highest wealth are not contributing in proportion to their wealth. Rather, they are stealing their wealth from the bottom 99.9% by stealing their purchasing power by printing new money.
If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org.
For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.
This misses the point of the article, which is that many in the top 0.1% got there from some form of self-dealing. His argument is that they are profiting from their position in the economy rather than from the value they add.
And by position, he doesn't mean nearness to the money press. I think he means nearness to the center of wealth and power, which at the moment happens to be the financial industry.
> This is where the wealth of the top 0.1% comes from. Freshly printed money.
I'm sorry but this statement is very wrong. Newly printed money enters the economy through interbank loans. If I borrow $100 my net worth is exactly the same as before. I'm not any wealthier.
To set the record straight: the ability to expand or contract the money supply is an essential tool in managing the economy: the Fed can cool things down in a bubble (by raising rates and contracting the money supply) or heat things up in a downturn (by lowering rates and expanding the money supply). Otherwise, inflation or deflation can spiral out of control.
> Creating new money, i.e. counterfeiting, i.e. inflation, does not create new wealth.
Ok, but creating new money in an effort to grow the economy while managing inflation does create new wealth-- or more accurately, creates an environment in which wealth can more easily be created. Especially in comparison to the alternative: an unmanaged economy that is completely at the mercy of panics and bubbles. Think the last crash was bad? The unemployment rate rose to 14% during the six years following the panic of 1873, which was largely caused and substantially prolonged by the inflexibility of the money supply (which was still tied to silver and gold).
I'm getting a little tired of the anti-fiat currency crowd. You say you learned about economics; you might want to get your money back. I'm sure you're a very smart person, astrohacker, but your perspective here is unsupported and stands in direct contradiction to the last 80 years of economic thought. And no, the bitcoin crowd do not count as economists.
The self-dealing by the banks since 2008 has been almost wholly underwritten by the Fed and the Treasury. Beyond TARP there are myriad guarantees, lending programs, and regulatory exemptions, all designed to provide the banks with greater profit and allowing them to offload risk, usually to the Fed or the taxpayer. Indeed, if you look closely, much of the "profit" in the banking system today is coming from banks borrowing at Fed subsidized rates and lending that money back to the U.S. government.
Most of the profit in the banking industry comes from being able to take on massive risk, while simultaneously being cushioned from that risk by the government. Risky positions and derivatives are extremely profitable, but for most people -- those without guaranteed bailouts, or cushy borrowing rates -- the risk is too great. For investment banks, as we've seen, the risk is minimal to nonexistant (or at least the banks seem to function as though it is).
Traditionally, the role of the financial industry was to "provide access to capital," primarily by underwriting, facilitating, and assisting in the execution of large transactions and deals for corporate clients. This role is, ostensibly at least, productive to the overall ("real") economy.
Over the last 30-odd years, and especially over the last decade, the center of profit for the financial industry has shifted away from its traditional role (transactional facilitation), and toward the taking of proprietary positions in various capital markets. It's simply too tempting not to -- as Uncle Sam will lend you your leverage virtually free of charge, and he'll also be there to mop up your mess if you make one.
Imagine being able to gamble at a roulette table with free money, and being given more chips every time your bet busts.
I'd like to add that responsibility for banks providing loans backed by the taxpayer ultimately falls on voters. This is what fannie mae/sallie mae etc are all about. Disconnecting access to credit from the ability to repay it inevitably results in loans that will default.
Politicians sold people stuff like fannie mae and people voted for it by electing them. And I guess voting in favour of such things is inevitable when not all voters are taxpayers. An extreme solution might be limiting votes to people who are paying taxes. This seems logical but is obviously politically impossible.
"...I guess voting in favour of such things is inevitable when not all voters are taxpayers."
I get the premise of this logic, i.e., that poor people don't pay taxes and therefore don't care about spending taxpayer dollars. I've seen it presented hundreds of times. But I think, in all honesty, that such a theory is giving the poor too much credit. It assumes that the poor are making conscious decisions based on rational evaluations of their economic incentives. I'm not convinced they think that way. Furthermore, I'm not convinced that they're even informed enough to know what they're doing when they vote on such things.
Some of the blame lies on the voters for voting without understanding, sure. But the politicians -- many of whom are paid for by lobbies -- bear greater responsibility for selling bullshit to underinformed voters, and for coucing the bullshit in emotionally manipulative ways.
> [programs are] designed to provide the banks with greater profit and allowing them to offload risk
Yes, the Fed is essentially paying the banks to loan money. It's not because the Fed is corrupt, though. It's because that's how bad the economy is.
Normally, banks will happily lend money. But when the risk of default is greater, as it is in a recession, banks are stingy with loans: they only loan to those with better credit-- and at a higher interest rate.
Bank liquidity is so tight right now (yes, it's their own fault) and the economic outlook so dim that if they had their druthers, banks wouldn't lend at all. If that happened, the economy would have an even worse outlook.
Luckily, the Fed can encourage banks to lend by giving them a discount on money (usually around 0.25%). Right now, however, the Fed can't give a discount because the rate is already at 0%. Thus, the present situation of the Fed basically throwing money at the banks, begging them to lend it out to the broader economy.
This is what is known as an edge case.
Don't like it? Join the club. What's happened since 2008 has sickened the remaining responsible, ethical folks managing the economy. But it's not right to impugn the Fed with the actions of a few irresponsible investment banks. If you read Sorkin's account in Too Big to Fail it's plain to see how Paulson and Geithner's actions amounted to making the best of a bad situation. In their case, it's important to distinguish between the appearance of impropriety and actual impropriety.
Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?
If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value, then why must the ordinary people or businesses be charged twice by first the lowering in value of the money and second the paying of a higher interest rate, often much higher, to the end bank which lends it?
This system currently concentrates wealth and thus power to the banks. Why, when we probably do not even need them at all and can simply have a massive national bank.
> Why doesn't the Fed just lend this money to ordinary people and businesses directly at 0% interest?
Good question. Two questions, actually: why doesn't the central bank lend to individuals, and why can't individuals get the same interest rate on loans as a bank.
One reason you and I can't get loans at the prime rate (normally in the 2-5% range) is because we don't have the same creditworthiness as a bank. I don't know about you, but I don't have hundreds of millions of dollars of assets like banks do.
(A decade or two ago, when banking was a more boring and staid business, the creditworthiness of a bank was virtually never in question. In comparison, individuals go bankrupt all time. Granted, there have been periods of banking abuse-- the S&L scandal, the over-leveraging in the 2000s, etc-- and one can rightly criticize the banks in those contexts. In fact, lots of people think that banking should return to the lower-risk model of banking, where banks are more deserving of their credit. But back to your questions.)
Why doesn't the Fed lend to individuals? The Fed's mission is to set fiscal policy. From
http://www.federalreserve.gov/pf/pf.htm, "Goals of Monetary Policy":
The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates. When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living. Moreover, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation - and the need to guard against such losses - are minimized, households are encouraged to save more and businesses are encouraged to invest more.
So you see, the intent of this modern economic tool, control of the money supply, is to promote stability while maximizing output. You said:
If we are going to have such a system whereby the Fed must print money, which means that the money in the system looses value...
Actually, printing money doesn't necessarily mean that existing money loses value. The Fed attempts to expand the money supply as the economy grows to maintain the current value of money. If it the money supply were suddenly static while the economy continued to grow, I believe this would result in a deflationary spiral: the first stage is where the expanding value of the whole economy must be denominated by a fixed pool of money, causing the value of that money to increase-- which sounds nice at first. But deflation reduces incentives toward spending and lending, and ultimately curbs growth-- which is bad. So if the size of the economy were fixed, then perhaps a fixed money supply would be desirable. Fortunately, the global economy, in the long term, is growing; so the money supply must grow as well. This reaches the limits of my memory of basic macroeconomics from my B.A. in the late 90s. I'm a programmer; this stuff isn't top of mind, so I'm sure an actual economist could provide better explanations of several of the points above. But I think it's generally accurate.
If I could get 0-1% APR loans then I could make money buying US treasuries. This while technically different from being handed money that you get to keep it is still functionally identical. As to comparing unemployment rates, if you compare identical numbers we have a higher unemployment rate now than during the great depression.
PS: A close friend of mine overheard a conversation that was basically "My husband only made 80 million last year, what happens if my social circle finds out?". Her friend actually understood how terrible this was, why her friend was sobbing, and was vary sympathetic. When you are close enough to overhear those in power but don't the goodies there is a lot of pressure to seek it out. However, a family of 4 living off of 42k/year without heath insurance can feel the same way to a 250k combined income. Which IMO muddles the debate.
I understand the reasoning that the fed & equivalents in other countries are supposed to manage the money supply as a smoothing function in booms and busts. I have never managed to accept though that the decision making of a committee can outperform the decision making of the market itself.
The problem is that market performance is never pure, and even when it is, the performance can be so volatile that side-effects permanently harm communities and subsequently offset the market performance.
And of course performance isn't everything. The 1-person committee in charge of driving a tractor trailer, for example, will deliberately choose sub-optimal performance when driving down a steep grade, because optimal short-term performance would result in a crash and complete long-term failure.
You say "in direct contradiction to the last 80 years of economic thought", but we have not been off of gold and on fiat for that long, more like 40 years IIRC.
Even the swiss franc was pegged to gold until 2000. The Fed is getting pretty limited to what it can do by lowering rates.
With only 6% more unemployment, we would be at 1870s levels (completely unmanageable)?
Calling it counterfeiting is a bit extreme, though.
Gold was criminalized for use in transactions in 1933 by executive order. I think that's a fair point to mark the end of the "gold standard" and the beginning of the fiat era. It is true the US government would redeem dollars for gold for foreign countries up to 1970 or so, under Nixon... but indie the USA, it was a crime to use gold as money. (Though jewelry was allowed) up until the 1970s.
He's using the term "counterfeiting" in the economic sense.
One of the things that makes something money in economics is that it is difficult to duplicate, so you can't just make more of it for yourself. Fiat currency doesn't have that restraint. So, we can say it is not money, or we can say that it is being counterfeited. This is not a word chosen for its alarm value, though it should make you alarmed.
Not really. Gold is held as a standard, but I would argue that gold itself is nothing more than another form of fiat. Why is gold worth anything? Because we all agree that it is. How much gold is there? Whatever is reported by the governments who hold it. There's no way to check. There are ways to guess, but it's just a shiny metal that we all agree is worth exchange.
Limiting us to gold also exposes us to massive economic swings, due to the limited ability to control how much or how little we all agree exists. I always hear people talk about how we 'print money' when we need it but NO ONE mentions that we also take money OUT of the economy all of the time.
"Why is gold worth anything? Because we all agree that it is."
True to some extent, but it does have more intrinsic value than paper currency. 1) It's rare enough that small amounts can be used to trade, but common enough that lots of people can have some. 2) It is pretty (subjective, but agreed-upon across many cultures). 3) It is chemically stable - doesn't rust or tarnish - so if you have 5oz today, you'll still have 5oz 10 years from now.
Reasons like these were explored on a Planet Money podcast, and they concluded that gold isn't an arbitrary choice; if you could pick any element from the periodic table to use for money, gold is the logical choice.
You described the requirements for a medium of exchange, and they make sense. But I don't think that that means "value" necessarily. Value is bread when I am hungry. Or gold when I need to make microchip contacts - but that usage is nowhere near justifying the price that gold actually trades at.
This is just a nitpick with the use of term "intrinsic value" - gold's characteristics make it a good form of money, but it's still (abstractly speaking) on a fiat basis.
I don't see how it could really work otherwise. There is no such thing as a good that everyone would value equally. Intrinsic value varies depending on the needs of the traders.
See, that's exactly the problem. The intrinsic value of anything - in this case, gold - relies on agreement of the scarcity. Truthfully, we don't know the scarcity of gold, or the amount that exists. We have only educated guesses.
Controlling the monetary supply with "paper" currency (which is an inaccurate term, "digital" currency is the reality) is much more stable and controllable. The US Government says they have $50,000,000,000,000, and the global economic capital markets either agree or don't agree.
Newb question: If new money only gets in the system by loans how do we not run out of money? If I lend you 100 bucks you have to pay back 105 that is great and all. If I loan you every dollar in existence and you have to pay back every dollar in existence plus 5% then there is a problem.
If there is only $100 in the economy, I can still owe you $105. To pay it back, I could start working for you and be paid $1 per hour. Now everytime you pay me $1, I would pay you back this dollar until my debt is zero.
In the real-world, with more than two persons, it would look more like this: I pay you back some amount of the debt, you spend this money and it propagates through the economy, until some part of it reaches me (in the form of a wage), so that I can use it to pay back more of the debt.
I realize that the amount of debt can be larger than the total amount of money. In fact given every dollar in existence is on loan from the federal reserve the total amount of debt will always be higher than the total number of dollars in the system by design. The question is, how does the system not implode under the massive amount of debt that is ever increasing?
This fact is part of the money system. When a loan is taken out from a bank, the principal of the loan is created, but the interest is not. This creates a competition in the economy to get the money that is not created to pay back the interest on the loans where some people can and some people cannot. Defaults are inherent to the monetary system as it is currently implemented. See "The Money Fix" (documentary) for the best explanation of this process that I have seen.
Read up on Steve Keen or find a good explanation video for fractional reserve banking.
The short answer is that we have a money supply that must grow by the amount of interest owed each year. This necessitates more loans. Which means more interest...
You say "Banks, and the Federal Reserve, create new money". That is factually untrue: only the Federal Reserve can legally create new money in the US. Since you mentioned it by name, you are definitely talking about the US, but the same state holds in virtually all developed countries as well: one designated "central bank" entity creates money, the others don't.
Per your main point, yes, the central bank creates money, but it doesn't "give" it to anyone. Seriously, you describe it as if there's a "printing party" at the FR, and only the rich get invited to grab booty bags stuffed with trillions of freshly minted dollars.
The truth, of course, is that the FR (and secondary banks) can only lend that money. They lend it for a variety of people and reasons. Not too long ago, they lent it to too many people. Not because their kind heart, but because it's a business: they lend it out hoping to get it back with interest.
Who do they lend it out to? Well, to some of the people here, for starters. Because what you failed to consider is that if I'm already at the top 0.1%, the best thing for me is to keep the situation static: not printing any new money. Because you're talking about the top 0.1% dollar earners and holders. Inflation dilutes their assets and earnings just like everybody else's, and in absolute values, they lose more.
Lending is (generally) an instrument of economic growth, a way to fund innovation and investment in production of new products and services. Guess what, if nobody can get loans, new businesses and startups won't get funding either.
Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out.
And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.
So you're calling fractional reserve banking "counterfeiting". I assume you oppose it.
Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments.
So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available.
You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc.
Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit.
In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely.
The fact that current millionaires are first generation is kind of inapposite. We haven't really been on a fractional reserve system for long enough to really create generations of financial dynasties.
... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor.
No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.
> The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180
you should learn about accounting. the loanee also has an $80 debt to the bank. no money is created. in fact, even if the bank didn't exist, in your fantasy land, basically everyone would be "money counterfeiters".
let's construct a scenario. when you loan your aunt $100, you give her $100, and then you sign a little contract with her indicating she owes you $100. you now have an asset worth $100 (the contract), and she now has a fresh $100 bill. oh my god, you just magically created $100! you're a counterfeiter!
when you deposit money in a bank, you loan them your money, which they then loan out. your checking account is essentially a low risk, pooled, variably timed bond that you buy from the bank.
i have a question for you though. do you believe in free markets? if so, then why do you oppose fractional reserve banking, which, at its fundamental core, is a contractual agreement between two parties?
Fractional reserve banking is the process you described. Give the bank $100, it is then legally obliged to only keep X%, let's say 10%. Hence, why most - if not all - banks today are vulnerable to a 'run on the bank', because banks never have 100% of outstanding liabilities immediately liquid.
However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand. Those entrepreneurs take that money at a relatively low interest rate (in America anyway) and invest it into their company, believing that the return they can generate is higher than the interest they pay.
Those entrepreneurs in turn hire people and when they are successful, they pay themselves a lot of money. They can also sell the business at some point in the future.
All the while, they pay back the bank the principal + interest and they have their business. This is the way it should work and this is the way it works about 80% of the time.
The other way fractional reserve banking works is that those same banks, end up using some of those funds to invest. They invest in a diversity of assets - stocks, gov't debt, etc.
They also invest in an asset class known as 'Alternative Assets'. You know what type of fund is a major beneficiary of raising money from banks and large financial institutions by fulfilling the alternative asset type category? Venture Capital funds.
Sure, you can argue that there is a bubble in Silicon Valley, but VC funds have been - undoubtedly - a major part in the major creation of MANY things we take for granted today. From Fairchild Semiconductor to Apple to Intel to Facebook, Twitter, Microsoft (eventually), Cisco to FedEx, UPS, McDonalds, Burger King, to many others in between.
Guess who got rich along the way? All those founders + many employees. Not just in earning good wages, but also in stock options and experience for their next job.
So let's just cut this crap about fractional reserve banking being the bane of society.
Sure, fiat currency, can and does lead to inflation - but inflation is the cost of technological advancement.
If there was no fiat currency, we (the ENTIRE world) would have gone through the worst depression we have ever seen - rather than just a 'Great Recession'. It would make the 1930s look like a blip in the radar.
It is precisely because the fiscal and monetary authorities were able to take those drastic measures to save the global economic system, that we can even be discussing this today.
It's also easy to dismiss the crisis as being caused by Wall Street, but...again...progress and advancement comes with a price.
Also, if you hate fiat currency so much and you think the world would see less recessions as a result of going back to the gold standard or backed by some finite amount of money, how about you take a look at history for a sec: http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...
As you can see, the list of recessions before 1960 is pretty extensive.
America 'broke' the Bretton Woods system in 1968 - http://en.wikipedia.org/wiki/Bretton_Woods_system - and that essentially marked the end of using a reserve currency backed by a physical good (gold). Since then, there have been recessions but they haven't been as severe as many before the great depression.
The 1800s were absolutely BRUTAL when it comes to economic recessions. Going through that list, it feels as if almost every year was a recession. Kinda insane.
I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight. Every system has it's drawbacks, and has its pros. The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks. What this 2008 credit crisis has shown us, is that they were DEAD right. We can debate the causes of the crisis until the cows come home, but what cannot be debated is that the policymakers (from Hank Paulson, Geithner, Bernanke, Sheila Beir, Jean-Claude Trichet, Mervyn King, and everyone else around them in their jurisdictions) made the right choices and used the right tools - because the world economy has truly been saved from possibly the worst recession we have ever seen. The only thing worse than what could have been, is what could have been had America defaulted on it's debts - but that's another argument for another day.
Oh, and when the Fed prints new money and earns interest on that new money, if they earn any profit you know who gets that? You. The taxpayer. It's called seigniorage - http://en.wikipedia.org/wiki/Seigniorage . At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range. Imagine ANY corporation paying a tax bill that large.
Edit 2: Here is a nice summary of the Feds performance and how much it paid over to the US Treasury in 2009 and 2010 if anyone wants to debate their performance, oh and this is ON TOP of them saving the world economy (basically single handedly) - http://www.marketwatch.com/story/the-feds-annual-profit-surg...
> However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand.
Banks create 80% of the money and declare themselves owner of it, which they then loan out. There is nothing wrong with loaning money. But there is something very wrong with creating new money and then loaning it out, which is what banks do. They are money trolls... hijacking 80% of the money and charging a toll for using it.
> I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight.
Bitcoin is a viable alternative. (I'm aware of all the limitations of bitcoin, like the maximum rate of transactions. But the fundamentals are sound. The problems that exist can and will be fixed in time. Bitcoin will scale to be a global currency.)
> The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks.
Nope. It very much is because bankers wanted to get rich. The Federal Reserve was designed by bankers. Other central banks are designed by bankers. Governments go along with it because they get to benefit from the inflation just like the bankers.
> At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range.
The Fed does not produce wealth. Any profits they give to the government, thus saving taxpayers a little money, are more than offset by the loss in purchasing power the taxpayers suffer through inflation.
At this point now, based on your replies, I can only assume you are trolling so I will ignore the first 2 responses and reply the to third and fourth.
>Nope. It very much is because bankers wanted to get rich. The Federal Reserve was designed by bankers. Other central banks are designed by bankers. Governments go along with it because they get to benefit from the inflation just like the bankers.
Are you a techie? Do you understand the web? Who would you want writing legislation to govern the web? Lawyers who are clueless about the web and think that the internet is a series of tubes, or people that are VERY web savvy - like Tim Berners-Lee, et. al? The same thing applies to finance, banking and everything else. Makes no sense to have people writing legislation or creating systems that don't understand what they are doing.
>The Fed does not produce wealth. Any profits they give to the government, thus saving taxpayers a little money, are more than offset by the loss in purchasing power the taxpayers suffer through inflation.
If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
>If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
That is because all that inflation has been exported to other countries. There are economies who have bet their growth on exports and depend on a strong dollar.
It's going to be just hilarious when China realises it can't actually do anything with all the shiny pieces of green paper we've posted them in exchange for most of their industrial output for a couple of decades, not to mention the whole Middle East.
I'm not a troll. Read my blog, my past posts here, posts on reddit, posts on the Bitcoin Forum, and my Tweets. I mean what I say.
> Are you a techie? Do you understand the web? Who would you want writing legislation to govern the web? Lawyers who are clueless about the web and think that the internet is a series of tubes, or people that are VERY web savvy - like Tim Berners-Lee, et. al? The same thing applies to finance, banking and everything else. Makes no sense to have people writing legislation or creating systems that don't understand what they are doing.
The tech equivalent of the Fed would be if the techies designed an internet where 1) all information goes through some central servers that they control, 2) they sell that information and profit, 3) everyone is legally required to use their internet and not a competing internet for sending information over long distances. This would be a corrupt, Fed-like version of the internet where some particular group of people have all the power and use it for their own benefit. This analogy isn't perfect, but it captures the basic point, that the Fed was designed in a corrupt way. It doesn't matter that the corrupt people were experts or not. If anything, being experts and using expert-jargon just allowed them to mislead everyone about the true purpose of their design - socialism for the rich.
For more of this type of information on the Fed, read "End the Fed" by Ron Paul and "The Case Against the Fed" by Murray Rothbard.
> If that's the case, why has inflation been so low in the US in the last two years, when the Fed undertook the largest expansion of it's balance sheet in modern history? i.e. it has printed more money recently, than at any other time in it's mandate - but inflation AND inflation expectations are still low.
The Fed publishes misleading inflation numbers. Anyone who spends a lot of their income on things like food and energy recognizes that prices are rising pretty quickly. For me one price that stands out is that a cup of coffee used to cost less than $2 a few years ago, but now costs something like $2.30. It stands out because paying $2 and receiving a nickle as change is a lot more convenient than paying $3 and receiving $0.70 as change.
However, I agree that inflation is not as high as I would expect given just how much money the Fed has printed. I'm not exactly sure where the new money has gone, but it is probably just sitting around in some bank accounts somewhere, not circulating in the economy, and that's why we haven't felt it more than we have. I suppose it is probably being used by banks to patch up their balance sheets after the crisis and that's why it is just sitting there. My bet would be that in the coming years, that money will get used, and that's when we will really start to feel the inflation. When coffee reaches $5 per cup, we will know QE1 and QE2, etc., have trickled down.
I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight
Bashing something when you don't have a better option is timeless. People do it all the time. I don't blame you for getting a little warm under the collar over it. Heck, I'm currently irked by the same thing with power. Alternative power never gets to move forward because nuclear is scary, windmills kill birds, etc. Coal is the worst by far, but we're sticking with it because we haven't found the perfect free energy source.
I agree with you, but it's a better argument to say Intel, Facebook, etc. created huge consumer surpluses, so the real beneficiaries of VC investment were the consumers of the products which were created due to VC investments in companies, more so than employees and founders.
Hundreds of millions of people have benefitted from Intel CPUs; far more than have every worked for Intel or owned Intel stock.
I agree that hundreds of millions of people have benefited from Intel CPUs, McDonald's burgers and everything else by those companies.
But I was talking in strictly financial terms. The founders, employees and early shareholders benefited the most from those companies in financial terms. The economy did benefit significantly, indirectly, no doubt....just trying to bring it back to his argument about 'bankers milking the fractional reserve system for their profit'.
I have been wondering about this and you may be the person to answer it. My thought is that inflation only occurs when the increase in money supply is greater than the increase in wealth generated in the economy. So if an economies' wealth increases at 5% a year and so does the money supply then there's no inflation.
This is an interesting way to put it, but I must admit I am not sure.
The issue I have with this definition is that wealth can be generated even without new money being created - we are seeing it in Silicon Valley at the moment, where vast amounts of wealth are created largely on the back of old money being recycled.
Strictly speaking, inflation occurs when more money chases the same assets - so the prices of those assets rise to accomodate the new money. So in theory, by having the prices for those assets rising, wealth is created. i.e. if $100B in new money is injected into the economy, and half of that goes into residential real estate, then the average house prices will increase by no other reason than more money is chasing fixed supply.
So the $200,000 house is now worth $300,000 - therefore $100K has been 'created'.
But the way the economy is so complex and intertwined, that increase in wealth could beget another increase in wealth - i.e. the owner of that house could take out say $50K of that to start a business which increases his wealth even more (PG has a fabulous essay about creating wealth from nothing) out of his sweat (i.e. not related to inflation other than the fact that he used the rise in the price of his house to start the process but everything else was his own doing).
The truth is that I don't think modern economics truly understands inflation yet. For instance, America pumped a TON of new money into the economy (both fiscally and monetarily) and inflation has been subdued in America.
China pumped in a moderate amount of money, and inflation has been out of control recently. i.e. much more than the money they have pumped in, so they have been having to tighten the reins.
Suffice it to say, I don't know. I wish I could condense it to a nice nugget like that, but I can't.
FRB is fine in a free banking system. Competition would create an ideal level of reserves by means of some banks dying and some thriving. We do not have that. Large banks are shielded from their fuckups. This creates perverse incentives for them to make high risk/high reward investments with other people's money.
Exactly. All this massive discussions about creating new money somehow ingnores the elephant in the room: If banks with too much leverage would actually be able to default people will suddenly notice the problem and check their bank's reserves before opening a deposit or something like that (in historical timeframes, i.e. years ...).
Now the problem is obviously that everyone who went along for the ride, hoping for the best will go bust, too. Among them the top 0.1% (or at least a large part, you need to substract the Warren Buffet type). Obviously the rich and powerful don't like becoming poor and deprived of power, so the bailout themselves via the gov't/fed.
And as a strawmen they set up the crumbling 401k savings of the 99.9% normals.
An aside: I seriously wonder what would have happend if the gov't would have continued to let banks default. I don't think it'd be much worse than the Marshall plan for Germany with it's complete reset of the (liquid) wealth after WW2. And that went really well. And for a bit of fairness, resetting the clock every 80 (because people tend to forget the last utter economic catastrophe) probably won't hurt.
You can argue about what constitutes "giving money" vs. loaning money, but in certain cases there has been very little difference. Take the "loans" made available to the top .1% via TALF. Matt Taibbi describes the non-recourse loans handed out the wealthy and well-connected in this piece: http://www.rollingstone.com/politics/news/the-real-housewive... .
Banks do create money using the fractional reserve system. The majority of money in the economy was created by banks other than the Federal Reserve. This is a simple fact. They also create money through loans, mainly mortgages. They loan out money they don't actually have, which is the same as issuing money. Since this behaviour carries systemic risk, they are protected by the FDIC -- the taxpayers.
> That is factually untrue: only the Federal Reserve can legally create new money in the US
That is factually untrue: Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public... The actual process of money creation takes place primarily in banks
In the United States - Federal Reserve is a private organisation and its owners are hardly known to anyone, its like a commercial bank with special rights to print money
while in other countries in the world central bank is a government institution - state organisation
Yep, fiat money systems are at the core of modern wealth inequality. Regulations and other measures will have little impact until we address this. Bailouts, taxes, budgets, deficits, regulations: none of it has much relative quantitative significance when the Fed is doling out many trillions behind the scenes. This money directly benefits the very wealthiest and regressively dilutes the rest on a scale that vastly exceeds the effects of any other policies. Abuse of fiat money is the ultimate economic elephant in the room.
It's funny that you say this, because prior to the adoption of fiat money systems, class-warfare leaders agitated for decades (centuries, even?) in favor of a system of fiat money, because they saw fiat money as a way to reduce wealth inequality. The logic goes like this:
1: In general, poor people borrow money from rich people. Interest payments on these loans is a transfer of wealth from the poor to the rich: an increase in debt inequality.
2: Fiat money is much more subject to inflation than commodity money.
3: When inflation occurs, the real value of debts is reduced.
4: By adopting fiat money and the accompanying continuous inflation, a situation would be created whereby poor people could borrow money from the rich, use it to create wealth for themselves, and then effectively pay back less than they had borrowed.
I'm not saying they were right, I'm just describing their ideas. I find the whole situation ironic.
Agreed. Inflation amounts to stealing from people with savings.
I haven't read the book you linked to yet but I just wanted to chime in and reference another great little book "How and economy grows and why it crashes" by Peter & Andrew Schiff. It's an extremely readable cartoon book that explains recent American economic history in a comic fashion and shows the differences between keynesian and austrian thinking on the subject.
As much as I favor low taxation and hate class warfare attacks on the wealthy, I think we ought to tax "freshly printed money" at a much higher rate, or figure out a more equitable way to create money... if we have to create money. Our financial system (the one created and regulated by the U.S. Federal Government) is so corrupt, as evident by TARP and the lack of lending and recovery. The only way its gonna change is if the dollar stops acting as the world's reserve currency, i.e. collapses. Only then do I think we have a chance of replacing it with something better. Don't hold your breath. The rest of the world is just as corrupt and financially unhealthy, so the dollar will remain superior.
There's no reason to create new money[1]. As I argued in my post, all inflation can do is change the distribution of the purchasing power of the money... not create new wealth. But the market already handles the distribution or purchasing power just fine through normal market forces. Good businesses get more purchasing power and grow. Bad businesses lose purchasing power until they collapse. The only reason to inflate the money supply is to scam everyone because you get all the new money.
As for replacing the dollar, bitcoin is the only reasonable alternative that presently exists. Fiat currencies almost certainly will never work, because the temptation to inflate them is too great. Gold can't work because you can't send it over the internet. But bitcoins both can't be inflated and can be sent over the internet. No government will decide to switch from dollars/Euros/whatever to bitcoins. Rather, it will be the market that chooses them if they are appropriate.
[1] If you actually halted inflation of the dollar, then as technology continues to increase the supply of everything, eventually the dollar would be so valuable that a cup of coffee would cost less than a penny. You would need to make new monetary units worth less than a penny so that cheap things like coffee can be purchased with them. You would do this by taking your pennies to a bank and getting, say, 100 penny pennies with each penny, and then a cup of coffee could cost 78 penny pennies.
Right, new dollars have to enter the economy somewhere, and the purchasing power is increased at those points of entry, decreased everywhere else by an proportional amount.
I'm all for bitcoin but the powers at be will find a way to stop it if it catches on. But the cat is out of the bag. I just can't see the dollar standing up to all the benefits a technology like bitcoin affords.
What he's saying is that new dollars don't have to enter the economy. If you remove one penny and inject 100 penny pennies, you've only split up the penny, nothing else. With electronic banking this doesn't even have to be anything, as you can just work with fractional dollars (yes I know current software doesn't work like that, but it could).
And I agree with that as well. There might be some psychological issues switching to a deflationary system, though. Things that typically appreciate in nominal value (real estate, job skills, precious metals, art, etc.) will be appear to not be appreciating, even though relative to everyday goods in services, they will still appreciate. The only problem is that you can't have too much deflation, or else people will want to hold onto cash too much, will they not?
It makes sense that the members of the top 0.1% that a professional money manager comes in contact with are associated with the financial and banking industries. Yes, that I agree with.
I found this article poorly written and defended. I didn't find it HN worthy. It is basically an investment manager complaining that the wealthiest Americans are mostly in finance and don't pay enough taxes because most of their earnings are from capital gains. He makes a lot of presuppositions in his writing that he never defends. For example:
"I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities."
How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside.
"America's top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries."
Outsourcing is not bad. He treats it like it is a dirty world. Companies should have work done where it is most efficient. Google comparative advantage.
"It wasn't the hard-working 99.5%"
Because the top .5% aren't hard working.
"In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it."
By definition, the odds of getting into the top .5% have to be very slim because only .5% of the population can get in there.
Also, I should note that the lower 99.5% benefit from lower capital gains taxes when it comes to appreciation on their homes. Obviously, this hasn't been a benefit lately. But, this is important given that the home constitutes the biggest chunk of net worth for many families.
> How does finance destroy the broader economy in general? Liquid functional capital markets are critical for a stable economy. Finance is only bad for the economy when incentives are structures so that government limits the downside.
False dichotomy. The article talks about the current financial system in the US hurting the economy. It's not suggesting dismantling the financial system in general.
Step back for a moment. The financial industry is infrastructure. It's there to grease the wheels of productive industry. It facilitates growth, but cannot in itself create that growth. Now, last year the financial industry accounted for something like 1/3 of corporate profits. It's gotten absolutely immense. Do we need such massive institutions just to create "liquid functional capital markets?" Are these companies so profitable because they're really creating enormous amounts of value for the economy, or because being close to the money makes it easier to justify taking a percentage cut of the money flowing through the system?
Now, I'm not attacking them just because they're profitable. But to an extent they're profitable because the benefit tremendously from government protection. When Apple innovates and sells iPhones, they pay 35% tax on those profits, but when a trader at Goldman moves money around to make profits, they pay less than half that in taxes. If we believe that tax rates create incentive structures, does it really make sense to incentivize the latter so much more heavily than the former?
By definition, the odds of getting into the top .5% have to be very slim because only .5% of the population can get in there.
No, by definition, the odds of being in the top .5% at any given moment are very slim. In a system with a high degree of economic mobility, it's conceivable that people would enter (and leave) the top N% at a reasonably high rate. Whether or not such high mobility is a good thing is certainly an open question, although the author certainly seems to think it should be higher than it is now.
If you can't see the damage that the finance industry has done to the economy over the past decade or so, then I would suggest you haven't been paying attention.
I would suggest googling the following terms: "Angelo Mozilo", "control fraud", "William K. Black"
Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company. The picture is clear; entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them.
This paragraph ruffled my feathers quite a bit. It's overreaching to say that a programmer who managed to make out like a bandit when their company hit it big is just "diverting value from the US economy". That scenario is quite a bit different than, say, profiting off of elaborate financial engineering.
And of course large amounts of money have "ties" to the financial industry. What the heck else are you going to do with the money? Equating a programmer who happened to strike it rich during an IPO (presumably) with an investment banker as both being tied to the financial services industry is ridiculous.
To unruffle your feathers a bit -
I read this article earlier this week on a finance blog. To an extent, the language and profession influence here is slanted towards people following the financial readers.
His larger thread is about how the lower 5% are different from the top 1%. That the top 1% is made up primarily of finance types, but that he has clients who have reached the top 1% from different entry points.
Programmers who get acquired are being acquired (i.e. paid) mostly by people in the financial industry. IPOs are largely driven by large investment houses which are managed by people in the financial industry.
The financial industry itself is really just a word that describes people who decide where to direct vast sums of money. As soon as you are directing vast sums of money you get labeled as part of the financial industry.
There's a pretty simple solution: Abolish the capital gains tax, and tax all capital gains at the income tax rate. There is no more "capital gain". Only income. Whether your income was earned through labor or rents on capital that you own seems rather irrelevant to me.
Suppose I had invested $1 million in a private company 10 years ago. It is now worth much, much more, how much no one really knows. I go to a bank and mention I own 100,000 shares of XYZ corp. Could I have a loan please, collateralized with some of my shares? The bank says sure, how about $2 million at prime +0.3%. I say that's just fine.
Under current tax law there is no capital gain recognized, and it's hard to imagine how there could be, I don't even know how much my income is at this point, only that some bank is pretty sure it's bigger than $1 million. It's not that this was some complicated tax avoidance strategy through the Isle of Mann either, it's just a loan. Taxing non-cash income as cash income causes many difficult problems. Ask folks who exercised options on shares whose value evaporated during the lockup period how they felt about their tax bill?
This is an arms race we can't win, I'm pretty sure there's always going to be assets with values to murky to tax, but not too murky to borrow against no matter how generous we are with defining income. The top 0.1% are going to be a moving target, there's too much money at stake for them not to be.
This issue is generally described under the heading "effective capital gains tax rate" in the literature, which back when the rate was higher was between 3.4% and 6.6% (1960 to 1978).
What percent of very wealthy Americans do you think would renounce their citizenship based on this? How much less investment capital would there be in the USA based on that?
Note: Not asking for a value judgment ("good riddance if they do!" - not productive). Just your estimate as to what percent of wealthy Americans would give up their citizenship and how much less investment capital would result. It's an important detail to consider.
Echoing what rayiner said - where are the rich going to go?
Europe is less friendly to the rich - extremely so in the most pleasant of places. China? India? Neither are very pleasant places, and even with truckloads of cash has a hard time competing with the quality of life enjoyed in the US even under onerous taxation.
I think you're not giving enough credit to the American quality of life - it's why my family immigrated here from Asia. While developing Asian countries have seem dramatic improvements in the last two decades, the QOL in most of these countries still pales in comparison.
Just about anywhere someone used to the Western quality of life would want to go would have higher taxes.
That's not true. How about Hong Kong or Singapore where you certainly get a western style life with extra benefits: safer, cleaner, live-in maid service, better access to healthcare and a 15-20% all in tax rate. Have you been to Thailand or Indonesia? Sounds ridiculous but this is happening right now. I'm in banking and I hear my clients talk about it all the time. They're doing it as we speak (slowly migrating their business operations and key personell)
The thing about entrepreneurs is that they are an irrational bunch. I could introduce you to a couple of people who would rather put all their money into a boat and sink it than pay it as additional tax. Sounds crazy but from a growing number of people's perspectives, the problem isnt excess taxation, its excess taxation coupled with gross mismanagement. Nobody likes seeing their money go to waste, especially to causes they dont agree with (ie union pensions for government employees that retire after 20 years of service).
For instance, New Zealand. Nice place. Great People. First class quality of life-- better than the USA. Higher taxes than the USA in many ways, but the government is so much less corrupt that the taxes are much less of a burden. You don't mind paying when you see you're getting value for the money.
I was born in Thailand and go back to Bangkok regularly. Unless you want to live in isolation (maybe with your banker buddies), there is no comparison between living in the US and living in Thailand.
"Nobody likes seeing their money go to waste, especially to causes they dont agree with (ie union pensions for government employees that retire after 20 years of service)."
So the ultra rich obstruct attempts at making the system more efficient (i.e. getting rid of the for-profit healthcare industry in America which costs the average American more and delivers worse outcomes than other industrialized countries) and then use that as an excuse to not pay more taxes? That's a pretty good racket they got going there. The world's smallest violin must be playing for all those poor downtrodden multi-millionaire bankers...
There are many places an american can go. Unlike the USA, most countries don't tax your worldwide income. So, for instance, you could become a citizen of any of the EU countries that don't tax worldwide income, and earn your income outside that country tax free (and live outside it as well.)
I know of several countries within the EU where you can be a citizen and pay essentially no taxes, or extremely low taxes. These are very pleasant places as well. For instance, one location is the side of a very nice lake in switzerland (Campoin d' Italia) and Andorra has some nice tax advantages, and one of the best climates in Europe. Monaco is not bad, though expensive for my tastes, while Licthenstein, Austria, Switzerland, and all this british islands whose existence is for purposes of avoiding taxes aren't too bad either.
The idea that you can't have a high quality of life in China or India compared to the USA seems silly to me, but I haven't lived in either of those countries. There are many countries in Latin, South America, Asia and Europe where you can have as high a quality of life as the USA, or higher, and at much less cost than the USA.
I think the idea that anywhere desirable is worse than the USA is a kind of parochial perception. Of course ones preferences can vary, but, for instance, in many ways much of eastern europe is nicer than the USA, even though they are "poorer". There are many countries that are in many ways richer, or where you can have a better quality of life at the same or less cost.
I just think that people in every country believe that their country s superior to others, and can't imagine how anyone would want to live in another country... but they also haven't experienced those other countries.
I've visited a lot of countries, and have yet to visit one that was terrible, and about %50 of them are better than the USA in noticeable ways, and the ones that aren't as good, aren't as good in ways that aren't really all that bad.
"I know of several countries within the EU where you can be a citizen and pay essentially no taxes, or extremely low taxes."
If so, then why have the rich not moved already? Indeed, why have you not gone to these places? I mean, no tax, whether on capital gain or income, is better than any tax is it not?
I dont think your right. I've been in Bangalore for 2 months and its hard to decide where I have a better quality of life. Here I can rent a brand new 3 bedroom with gym and swimming pool for $400. Driver for $200 a month. Hospitals are cheaper and about as well equipped. You get all channels including HBO for $5 a month. Savings rate in a CD is 10%.
With the rampant unemployment in the US - I cant see why you would consider the US to be the higher quality of life right now.
Remember we're talking about the top 1% or 0.1% of the population here. The unemployment rate simply doesn't enter their quality of life equation. But quality of life is a big deal for rich people.
There are a number of surveys (Mercer, Economist, International Living etc) that rank countries according to quality of life factors and it's always the same places at the top of the list: Western Europe, Australia and New Zealand, North America, maybe Singapore and Japan. These are all, unsuprisingly, expensive places to live.
Wealthy people immigrating is a global phenomenon too; a few months ago there was a spate of news articles regarding rich Chinese looking to get out of China due to the low quality of life (eg http://www.time.com/time/world/article/0,8599,2077139,00.htm...).
If we are talking the top 1% then they can buy a building in Bangalore and put a helipad on it to fly them to the airport where they can travel wherever they want.
Ambani bought himself a building and a helipad to commute to his office. That way you've fixed the commute problem too.
Bangalore weather is also pretty awesome. I wish I had my kite and board ... its been windy the whole past month ...
I'm not sure a significant portion of people will renounce their citizenship over the capital gains tax rate. We didn't have a brain drain or mass emigration when the top income tax rate was 91% either.
To make tax policy based on a fear of wealthy Americans deciding to stop being American seems ludicrous.
Similarly, I think investment capital will remain in the US because of the opportunities this country provides for investment and enterprise. You have many countries which have much lower, or even zero capital gains taxes and only the ones with talent and the ability to produce return attract and maintain significant amounts of investment capital.
The Isle of Man, Jamaica, and Mexico don't have any capital gains taxes, but are obviously not attracting the kind of capital that the US does- and for good reasons.
When the top income tax was 91% (from 1951-1964), the capital gain tax was 25%. So while doctors and small businessmen pay >50% tax on earned income the uber rich paid 25%
Renounce their citizenship to go where? Europe (which is far less friendly to the rich)? Asia (what's the point of being rich if you have to live in the developing world?) Fears of wealthy people leaving are a red-herring.
Plus, who says we have a shortage of investment capital in the US? There is a ton of money floating around from pension funds and 401k accounts, even leaving out the money held by the very wealthy. If you look at the economy today, it's absurd to say that lack of capital is the reason for the lack of top-line growth.
For those of you responding skeptically to Lionhearted's question, I'm in the business of helping these people exit the United States. At any given point I have four or five of these cases going.
The total number for 2009 was 743, though, which is pretty small peanuts by the scale of the U.S. economy. It's not even large as a proportion of very-rich people.
That's the number of people who renounced. And that number is going up dramatically, and I've heard that the published figures for renouncement are way under-reported. (as in here are lawyers who have more clients who have renounced than the government claims renounced in total.) But on both sides these are just claims.
The number of people who simply moved their butts and their assets overseas is much higher. You can tell this is the case because the administration has been saber rattling for the last four years, and starting to work their way into currency controls.
Did you know, in order to renounce, you have to get the permission of the government? They charge an exit tax too for your funds. This is a currency control and it is one of the things that marked the soviet union as a bad regime. If you can't move your money in and out of a country, then you're not likely to invest in that country.
I'm not very rich, and I will renounce as soon as my second citizenship gets in. It will be easier for me because, not being very rich yet, I will be more likely to get permission of the government to give up my citizenship.
Yeah, I'd support making it both easier to leave the U.S. as well as to enter it--- make both renunciation and green-card procurement easier. I think the U.S. would come out pretty well on overall balance there, because it's a fairly popular place to live, and is artificially keeping out many people who would like to live there.
The evidence I can find is that the outward flow is a trickle rather than a flood (or even a modest current), though. Even if the 743 number is a 5x underestimate, that's still not much. I'm not sure it even balances the rich people flowing the other direction, e.g. the businessmen getting green cards under the ">$1m to invest" criterion (and no doubt there would be more of them if the green-card process were streamlined).
I don't think the U.S. is particularly unique in making it hard to renounce citizenship, though perhaps it's for different reasons. Many countries make it very hard to renounce citizenship if they think you're doing it to get out of mandatory military service, for example. For economic reasons, many require that there no longer be any links with the country, e.g. you can't renounce German citizenship if you still own businesses or property in Germany. France seems to have an additional timing requirement, where you can only renounce French citizenship within the first year after acquiring a second citizenship, so dual nationals can't decide 10 years later to leave the country and renounce the French citizenship.
But for every one of those wealthy Americans who is looking for a way out there is at least one wealthy person, if not ten, from China, Malaysia, South Africa, well, as you say, everywhere - looking for a way in to the US.
Their money comes with them.
We live in a global economy, however the number of doors or opportunities that are opened to you is related to how wealthy and/or educated you are.
The wealthy can renounce U.S. citizenship and lose the protection of U.S. system on their properties. Just don't cry when some thugs in their new home island state rob them of their wealth.
The U.S. system provides the scalability for these people to make vast wealth. Shouldn't they pay it back to keep it up? The system is expensive to upkeep. There ain't no free lunch.
Renouncing your citizenship for tax reasons triggers secondary tax laws that offset any benefits. (It's been a few years since I reviewed any tax law, but I've not heard of any changes in this area.)
Good point, but could you argue that those Americans that would renounce their citizen ship are already hiding that income in untaxable locations already?
I wonder if it would be a wash, you suddenly up the tax, and everyone that was ducking anyway leaves and the rest get taxed and fill the void.
All speculation of course, none of us would have numbers to know.
My thoughts exactly - the problem the author is alleging isn't that these things exist, it's summarized in his last paragraph:
A highly complex and largely discrete set of laws and exemptions from laws has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth. Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules.
In other words - the alleged problem is that you can't fix this tax stuff even if you wanted to because the people in control are the ones benefiting (and most other people aren't aware / don't care enough).
I'm not taking a position either way, just clarifying what the author is saying.
(The marginal rate of tax on capital gains is generally much lower than the marginal rate of tax on an equivalent earned income. The investment professionals who strike it big do so by engineering their income to arrive in the shape of capital. Tax it as income and suddenly a whole lot more tax revenue shows up ... and the Gini coefficient in the society in question drops a little bit.)
Taking advantage of capital gains might be tax avoidance from a certain point of view, but it's also a useful for helping grow wealth and the economy in general.
Having large sums of private capital helps the economy-- how does it help it? By making it easy to borrow money, like the VC that so many HNers are seeking.
So the argument for differential taxation of income versus capital gains is to incentive investment. However, I'm not sure investment needs to be incentivized right now. There is a ton of private capital floating around right now looking for productive investments in the US, and they just don't exist. So the money goes overseas, or into elaborate, questionable financial instruments.
It is not even clear that it is tax avoidance. In most situations the capital gains preference is meant to mitigate, and in fact only partially mitigates, income taxation at the corporate level.
Preferences for real estate and investment managers in the form of carried interest...well, that's another story.
If capital gains were taxed as regular income, that would mean a whole lot more money would be flowing into the governments coffers, and as such the income tax rate could be lowered as a result for all parties. You'd have to run the numbers to see but it seems reasonable.
Another problem with taxing capital gains heavily is that it distorts investment by discouraging dividends and buybacks in favor of risky attempts at growth. Companies irrationally choose to grow and make high risk acquisitions rather than simply pay out big dividends. This contributes to business cycle instability, as well as inefficient allocation of capital; the incentive is to keep capital locked up in a conglomerate.
The idea that it is possible for those that earn vast quantities of money more than your "standard joe" to pay _less_ tax on that considerably larger cash pile.
The line about lobbying for a new corporate exemption on "repatriating" cash from either tax havens or anywhere else abroad at the pitiful tax rate of 5.75% compared to the base 10% that someone that works at a diner has to pay illustrates the issue rather well.
This is cash that was taxed once in the foreign jurisdiction at whatever prevailing rate was in effect there. With the exception of the US, nearly all developed countries have territorial tax systems at which the rate on those foreign profits would be 0%.
A repatriation holiday would be a huge (and poorly targeted, considering nearly the entire benefit inures to about 10-20 firms) giveaway, but it's only discussed in the first place because of our strange worldwide corporate tax system.
If a non-US citizen works at a diner in a tax haven or anywhere else abroad, and brings money into the US, they typically pay 0% tax (to the US) on that money.
This is the analogous situation to non-US corporations (possibly owned by US corps) leaving profits overseas.
But typically, they are working there, not setting up a virtual office. If these super rich are working in the US, they should pay tax. If they are not working, why don't they deserve to be taxed?
The super rich working in the US do pay tax on their income. You seem to be conflating many separate issues, so let me explain in detail how it works.
Sergei Brin pays taxes on his income to the US.
Google Ireland doesn't pay taxes to the US on income earned in Ireland until they transfer the money to the US. (They do, however, pay taxes to Ireland.)
A guy working at a diner in Ireland will, as far as I know, never pay taxes even if he does transfer money to the US.
Google UK also pays most of it taxes to Ireland, despite the revenue being from the UK. Wonder if that has anything to do with Ireland having lower taxes?
I'm assuming it's increasing the long term capital gains tax rate. According to http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United..., the short term rate is as arjunnarayan suggested, barring any differences in exemptions between capital gains and income tax rates.
It's also an issue of timing and deferral. Because one can offset short-term capital gains with capital losses, and individuals generally have absolute control over realization of capital gains, the effective rate on capital gains can effectively be zero or near-zero given sufficient liquidity, despite a statutory rate equal to the ordinary income rate.
You also need to end the Federal Reserve and make fractional reserve banking illegal so no one can create new money and give it to themselves. Allow the market to handle the distribution of purchasing power. Not the government banking cartel.
Reminds me of the Citigroup reports on plutonomy that was allegedly leaked. The reports give an interesting, and to some degree offensive, look into the mindset of the plutocrats -- that is, the richest of the rich
Coming from HN, this just caught my eye on the NYT: "Even Marked Up, Luxury Goods Fly Off Shelves" (http://www.nytimes.com/2011/08/04/business/sales-of-luxury-g...) while the country struggles to pay its debts and is losing its future. Just goes to show how separated the top .5% of American society has become from the rest... What I as a an "Asian-European" will never get is the unmitigated adoration of material wealth in American society/mass culture. Can't help but feel that is also a part of the problem. I mean, you don't have to be all ethical and bright to realize that Einstein, for instance, was not particularly wealthy and yet deserved (and commanded) orders of magnitude more respect than your typical billionaire. What's with the obsession about bling?
The author of this article seems to be trying to confuse things:
Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.
What does "involved in some aspect" mean?
...built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset...CEO of a medium-cap tech company...another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.
I agree that those examples are not great at conveying the main point he's trying to make, but let's consider for a moment that the top .1% evaluates to a larger number than 5. Maybe he was calling out notable exceptions, or maybe it's just a poorly edited piece of writing.
I don't think he was calling out exceptions. The paragraph intersperses people working in finance (or their ex-wives) with people not working in finance and draws no distinction between them.
"One client runs a division of a major international investment bank..."
In fact, one particular sentence lists both financial wealth and non-financial wealth:
"Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company."
But maybe noahth is right, and the article is just poorly edited.
All of the people in the examples made money as salaried financial services employees or through stock. So for example, the programmer didn't make her money from selling her programming products; she sold her stock, a financial instrument.
She sold her stock, which represented ownership of a business.
If Mark Zuckerberg sold all his "stock" in Facebook, that doesn't mean he made his money from the financial services industry.
The majority of wealthy people are wealthy by equity (ownership of a business), not from annual income. If the author used traders as an example of people making money on stocks, that would be an argument more inline with his thesis.
The way he defines being involved with the finance sector, of course the majority of wealthy people (business owners) will have touched the financial services industry - the same way the average joe a touches retail bank.
The retail bank in no way makes Joe Average far richer than he already is by his own efforts.
And I don't think those Russian billionaires invested in Facebook just because they were yawning at the thought of depositing the money in a bank and the boring routine of such a transaction.
They all expect huge capital gains and the pump-and-dump institutional machinery of Wall Street is the instrumental system for this.
My point was the author's claim that the top of the top 1% is "involved in the financial services industry" is meaningless because of how he defines it. The only people who don't fit his description would be salaried employees.
To address your points - you're ignoring the difference in financial goals and economies of scale.
Joe is an employee. So his goal is to preserve the capital he earns, which is a service the retail bank offers. He earns a paltry interest on his money because 1. the bank lends his cash out very conservatively, and 2. he's not paying for the service of having it actively managed by a professional.
Rich people can not only afford professional money management, but very wealthy ones typical have access to higher quality investment vehicles than less wealthy rich. And since they have more capital (that they don't need) than Joe does, they tend to tolerate more risks. They also tend to get the rewards of that risk when its professionally managed.
At that scale of money, investment can have positive externalities. The capital invested in Facebook, Google, Apple, etc directly helped create jobs and expand the technology sector. Joe's money did comparatively little. Both are rewarded for their proportional economic impact. Capital gains is an incentive to keep rich people from parking their cash at a retail bank. Whether it works 100% effectively is definitely up for debate. But the general idea is that their cash can be deployed in a way that not only makes the rich richer, but the rest of society as well.
To add a second million to the first 1M is hard exhausting labor (lower rich achievers according to the article, in some real business sector), but to gain another 5-10M on any 100M already available is inevitable for the Top 0.01 on Wall Street.
I guess I understand this. (You express the idea as economies of scale, higher quality investment vehicles, and their professional management).
If this is true and OK to be as a situation, than in some pure math sense - relative velocity of financial growth compared to efforts to gain it - it seems that a tiny historically established minority of a super-rich guys and families (mostly in the banking and investment) will always be far, far ahead in money wealth.
And maybe even gaining momentum. There are many economical studies and observations that a certain wealth spread between the Top Richest and the rest is increasing, at a macroeconomic level. Is this good or bad?
A quote from the article: "... the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability."
If so - are the CEOs/founders/owners of Apple, Google, Facebook, Microsoft, Virgin Group, (you name it, any other huge real business success story), merely some outlying points WITHIN the TOP 0.01? How big is the amassed wealth of such iconic entrepreneurs compared to those that in a clan-wise manner are into banking/investment/real estate/government contracts (and the related politics)? And to what extent the financial wealth as evaluation of the former depends on the latter?
I don't have answers to the questions I've raised - perhaps it would be interesting for somebody to research and see the whole picture.
Why the fuck does he consider CEOs and others who sell their companies to be "directly connected to the finance industry?" To that extent, a cashier at wal-mart is directly connected to the finance industry because she helps a traded corporation make revenue.
As far as I can tell he equates making money from the sale of stock rather than from salary with being part of the finance industry. I stopped reading when I realized that.
Yeah, craziness. If he'd be open about his agenda but consistent with the terms reality uses, I'd be fine with it.
I actually think carry should be taxed as regular income (except that the people who get carry are the kind of people who could structure to get around this).
I'd also be ok with capital gains and regular income being taxed at the same rate IFF that top rate were low (say, 25%) without deductions/credits, AMT, etc. A flat ~25-30% tax for everyone, plus a decent personal exemption (possibly even refundable, so if it's "$20-30k in free money from the government per person per year, paid in cash or paid as a credit against taxes owed", some people can live 100% on the credit and not work.
Allowing capital gains to offset capital losses, with carryover, probably is enough privilege to capital gains vs. regular income. It may create some disinvestment at the margin, but there's plenty of capital out there. For a startup founder making $100mm at exit, there isn't really an argument that he'd take the $200k/yr job instead of the $100k/yr job with the shot at the big exit due to being taxed 25% vs. 15% at exit; the uncertainty remains in the "will my company sell (and will it be for big money)", not the tax rate at that time.
That said, I'm totally happy taking every capital gain benefit available to me; waiting 5 years for a $10mm tax-free capital gain (Small Business Jobs Act of 2010, good for investments including founder shares purchased until 12-31-2011) is pretty damn nice.
But in a way this rings true - after an exit event if the former CEO/founder gets mostly stocks/paper his financial well-being is deeply connected with the general well-being of Wall Street, as a system.
The more bullish is the market - the better for him, and for the whole ecosystem of financial institutions that serve him. In this sense he is a part of the financial industry and shares the general systemic risk (though, of course, this varies in individual cases and portfolios)
His position is no different than hers - the enriched with stocks ex-wife of an investment banker after the divorce (also a kind of exit strategy, btw).
Common fallacy: personifying "the top N%" as if it were some mostly static set of people -- hard for anyone else to break in, rare that anyone falls out once they make it in. The old class system anxiety.
In reality, the further you get towards the top, the harder it gets to stay there:
The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005. [1]
Here's another study with similar results across all income brackets. [2] None of the brackets are very stable; people move around quite a bit.
Or, we could just sit around reading collections of personal anecdotes. Seriously, why is this article on the front page?
This started off sounding like it was going to be a Repub/TeaParty/Koch-style political propaganda piece, but the further I went into it the more pleasantly surprised I became. Makes some good points about the distinction between different groups and tiers at the top of the American income ladders. It's true that the concerns and goals and challenges of upper income "working class" folks like small business entrepreneurs, doctors, lawyers are different than the folks from Real Money and the big financial firms, banks, executives of huge multi-nationals, etc. I also have become increasingly confident in the theory that the so-called credit crisis a few years ago was basically a setup or con job. There's a lot of evidence, at least at the level of circumstance and motive and means, aligned with it being true.
To those curious about this claim, I would recommend Nomi Prin's "It takes a Pillage". She, a former manager at Goldman Sachs, makes a strong argument for the bailouts being criminal.
I personally don't care much that these people are wealthy or even able to evade paying as much taxes as we do. The problem I have, and the problem I think the author is trying to expose is that DUE to their wealth, these top 0.1% are able to exert a vastly disproportionate amount of influence on our political and legal system, often times to the detriment of the other 99.9% of us, and preventing politicians from making the level headed, balanced decisions they need to make.
Even if the people as a organized collective can get together to rally against a certain issue, and even if that group can win, anybody with lobbying power (e.g. money) can simply lobby again at a later time to throw in some rider on a completely unrelated bill to pass some law getting what they want.
This is encouraging. Want to know what a truly sick economy looks like? One where the top 1% inherited their assets/incomes. Ignoring the huge selection effects in talking about the top .1% of winners in the financial markets is silly.
What planet are you from? This guy's mega-rich clients are mostly from "financial services, real estate and government contracting".
All of those things are either indirectly or directly subsidized by the US taxpayer. So the public is borrowing money and these folks are capitalizing it. And the Republicans claim to not be in favor of redistribution of wealth!
The bizarre thing is that if you looked at an analysis like this 25, 50, 100, 150 years ago, the picture would be different. The robber barons of the past built things, employed people. Investment bankers lobby for regulation to drum up business, and gouge people for their services, whatever they are.
Things aren't great. I'm not saying that. I'm not an apologist for the pretend free-market. I'm just saying this isn't the doom and gloom the original author or the vast majority of readers will probably think. WHat do you think 99% of human history looks like anyway? It looks like a boot stomping on a human face. Decrying the winners of the financial game, rigged though it is, as villains is just laughable compared to anything except rich white people problems.
Take a good look at the Forbes 400. The vast majority of them are entrepreneurs and though a sizeable number made their money from the financial industry it's no where near a majority - not even close.
We don't have the Forbes 4 million to view. But for every Zuckerberg on that list there are more than a few members of that 0.1% from members companies on that list.
I am not doubting that the financial industry influence is quite concentrated compared to others, but I am not convinced he's totally proven his case. Maybe the firm he represents has an outsized proportion of financial people as their clients.
Look at the filings for big companies. Usually the top incomes and options are given to the CEO, COO and CFO. CFOs are often sitting on large sacks of money and directly participating in the finance industry. Even companies with no other ties to finance or banking are usually playing around with the same mechanisms as hedge funds, banks and other investment organisations. You are making the mistake of thinking the only income a business makes today is from its core products and services. Most large businesses are making plenty of income from interest and investments if they aren't overflowing with debt.
I've only looked at the top 50 on that list so far, but it looks like only 20 are self-made entrepreneurs outside finance (13 in tech, 7 in other areas). 30 made their money either through inheritance or finance, or some combination (like inheritance+investment).
Elite keeps serfs ignorant by providing no economics education.
Voters fail to grasp debt situation.
US soft defaults, inflation etc.
Dollar loses preeminence, 50% of value, the unwarranted part.
Massive inflation affecting all imports, which is most of what people buy, since America makes very little.
Inflation acts as wealth tax, and transfers value from old to young. Many factories move (back) to US. More jobs. Less inequality.
So, I think the demand for dollars from overseas investors who want safety really hurts the US. You could do all this without the evaluation if you would start seeing China as a threat and get protectionist now. Autarchy, in fact.
So in a modern economy, accumulated wealth as an "earmark" on current and future productivity. People don't buy food and store it for retirement. They buy shares in Intel and get dividends from the labor of future workers to pay for their retirement. The current state of affairs seems to be one where too much has gotten earmarked. Those booming corporate profits that come from layoffs rather than above-the-line growth are going partly to CEOs, sure, but they're going mostly to retirement, pension, etc, funds. Retirees/near-retirees earmarking future productivity.
I think inflation is inevitable as the younger generation decides to reallocate this distribution of the fruits of its own labor.
A typical article spreading hate towards the rich portraying them as people that have insight into secret evil money making techniques unavailable to other people.
Any ways that hate has always been there and I don't think it's going anywhere.
Just delete it from HN, no need for it here.
While I appreciate the effort to bring attention to the serious differences between the simply well-off and the astonishingly-rich-and-powerful, I'm having trouble wrapping my head around some of this:
"While income and lifestyle are all relative, an after-tax income between $6.6k and $8.3k per month today will hardly buy the fantasy lifestyles that Americans see on TV and would consider 'rich.' In many areas in California or the East Coast, this positions one squarely in the hard working upper-middle class, and strict budgeting will be essential. An income of $190k post tax or $15.8k per month will certainly buy a nice lifestyle but is far from rich."
What in the hell?
Where I come from, six figures is rich, period. I grew up in a household whose yearly income was a bit over $100,000 (pre-tax), and had no delusions about my place in the economy. Sure, weren't "free from financial worry," but we nonetheless could afford the occasional vacation and a new or semi-new car when we needed it.
My significant other comes from a place where $50,000 each year (pre-tax) is considered rich (and this in the apparently-mythical California, no less). She grew up with a pre-tax annual income of less than $10,000.
While it's inaccurate an potentially damaging to misrepresent the degree to which it truly is the super-rich that benefit most dramatically from our economy, it also seems just as potentially damaging to write as though we really are all in the middle-class. This article seems to utterly silence the existence of poverty and the working class in order to make its point.
Maybe I just come from one of those strange parts of the country where we still have backwards things like "industry" and a "proletariat." I suspect, however, there's a lot more folks from places like where I'm from than places like the strange utopia this guy lives in.
I already knew the about the vast disparity in the top 1% of earners, but I did not know how difficult it is to retire comfortably. A 30-year retirement is quite a luxury.
If there is a reluctance among the very wealthy to pay taxes, I'd guess that they don't trust a government that they believe to be inefficient, and that they see no benefit in paying taxes for themselves or their businesses.
It seems like in order to get into that top .5 percent, you'd usually have to have a certain kind of perspective about reality, and to change the mindset of someone who takes every possible action in terms what's best for the growth of their wealth or their business might not be easy, sometimes close to impossible. Regulation is important here to keep these folks from getting carried away.
You'd have to get them to see the value in growing the economy as a whole and how that serves their interest. And hey, they may already know that and just not think the government is any good at growing the economy.
I guess it's about finding common ground and moving in a way that the very wealthy and everyone else thinks is beneficial and responsible.
I think most of the reason you can't trust the government is because these people are pulling the strings of the government. When you have a political structure where money means everything, money buys power. These people don't pay taxes because they have built the system so they don't have to. It's not that they don't trust the .gov, they essentially are the .gov.
>One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a "paper" asset.
This seems odd (also the example of programmer with stock options later) - so is he saying that because the payment is in equity you're in the financial sector / not producing real value? I'd read that last line as being disparaging about stock because it's "paper".
The only example with any bite is the investment banker admitting they think they add no value.
"Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%."
So how does an ordinary citizen become aware of 'these systems' and begin to participate in 'them'?
Regarding those who will only bring home 15k per month post retirement:
"And, for those folks who made enough to accumulate this much wealth during their working years, the reduction in income and lifestyle during retirement can be stressful."
This is where I started laughing out loud! What a profound lack of perspective.
The point of the article isn't that we should pity those folks making "only" $300k/year. They have nice houses and nice cars and eat at nice restaurants. However, they still need to worry about money. If your $300k/year is coming from your labor as a lawyer, and you go blind, your financial situation does a 180. If your $300k/year is coming from dividends on the huge pile of stock you own, that's a totally different ballgame.
Sounds like simply an observed fact to me. He didn't say he felt sorry for them, just that it causes them stress. The point was that these people aren't beyond financial worry.
I too did the same exact thing, and I share your opinion. People in the upper echelon, especially in the finance industry, have lost their minds. What ever happened to aphorism living below your means. I guess people that the quote references are not financially prudent, and honestly, deserve to suffer in my eyes, since they probably caused this mess to begin with.
Shit, to be honest, I'd be lucky to net 1/7th a month of that income while working this year. Hopefully, if everything goes better than plan, I'd be able to land a fulfilling job where I can net 1/6th, but I am highly skeptical though.
Koch Brother-backed tea party is a dangerous sign of this claim, if the law and public allow top 0.?1% to control the psychopath of US. So-called "small government" is just an excuse of going down to dictatorship by the rich few.
the distribution is skewed towards the top 0.1%. According to "This American Life", the percentage of psychopaths* is higher amongst the wealthy and successful than the rest of society.
Not sure what the definition of wealthy and successful is though.
*I wrote sociopaths by accident, although there's some debate as to wether there's a difference between the two.
Also, what's with the down votes? What did I say..?
Right that was my point... that the top 0.1% would probably have more. How did you arrive at the ~1k number you did? By extrapolating from general population incidence of sociopaths? That only works with even distribution.
I wasn't being totally serious, but I calculated the top 0.1% of total US population, and then 4% of that, which is apparently the percentage of sociopaths/psychopaths for that section of society. The average across the entire US population is about 1%.
I'll sum it up: hard working people in the bottom half of the "top 1%" are not evil power-brokers but the most successful professionals. You have to look at the top 0.5 or top 0.1% (I'd argue that even 0.1% is generous) before engaging "the corridors of power", which consists of financial and real estate elites as well as contractors exploiting corrupt government officials. Is this news?
A more interesting exposition might be the ruse that exists because Americans conflate these two classes of rich. It has all sorts of pernicious cultural effects. American conservatism is founded on the false belief that the $5m/year bankers are merely scaled-up versions of the $400k/year neurosurgeon who has been working hard since he was 6... when in fact, they're totally different.
This is fairly important if one looks at where revolutions begin. They usually start from the high end from the middle class, among people who are "rich" but not especially powerful. The American colonists were very wealthy, but had no clout because they were 3000 miles away from those making the decisions. The French revolutionary thought leaders were wealthy salon denizens, although far from the court at Versailles, and therefore increasingly out-of-power as the clouds darkened over France. History describes such revolutionaries, radicals, and agitators as "middle class" in hindsight (they're our heroes, and the U.S. associates "middle class" reflexively with virtue) but these people did, in fact, come overwhelmingly from the richest ~5 percent. The American "Founding Fathers" were downright rich. Revolutionary agitation usually comes when hard-working, intelligent, and previously fortunate people become out of power and hit a ceiling, either because society is deeply stagnant or because they're actively being deprived of autonomy. Eventually, conflict between the small, closed, social-network-based "upper" elite and the larger, fluid, merit-based "upper-middle" elite reaches a boiling point. It was this way at the end of the 18th century in America and France, and it will very likely be this way in the major conflict of the first third of the 21st century. The danger is that the conservative American has been misled into believing that the more noble elite ("elitist liberal intellectuals") is the oppressor while the truly damaging elite is held up as the good one, as if there were any similarity between a $20m/year, fifth-generation-wealthy banker and "Joe the Plumber". There's not. But conservative Americans have been led to believe that bankers are hard-working people just like them while "intellectuals" are an elitist enemy oppressor. Culture is, in the U.S., slowly replacing race as the elite's favorite divide-and-conquer mechanism. American conservatism is a machine for driving a wedge between the people who are trying to save this society ("liberal intellectuals", although neither word should be pejorative) and the common people of the country they are trying to save.
No news in the OP. The world is run by a morally debased and increasingly incompetent oligarchy, heavily intertwined with the banking system and with about 40% of its membership in the U.S. upper class. That was only news in 2008 to people who weren't paying attention.
"The French revolutionary thought leaders were wealthy salon denizens, although far from the court at Versailles, and therefore increasingly out-of-power as the clouds darkened over France. History describes such revolutionaries, radicals, and agitators as "middle class" in hindsight (they're our heroes, and the U.S. associates "middle class" reflexively with virtue) but these people did, in fact, come overwhelmingly from the richest ~5 percent."
Actually, by the traditional definition, they were still middle class, as higher classes were defined by more than just money (royalty, political position, etc.)
Correct. Only in relatively recent times has the distinction "class" become solely delineated by income or wealth.
Wealth has always been a big part of it, but throughout much of human history, wealth didn't create class; class created wealth. Your access to the monarch or ruling body granted you certain monopolistic privileges and land, from which you derived enormous wealth. But the wealth was the byproduct of, and not the generator of, class. (In fact, many extremely wealthy people, such as successful merchants and traders, were nevertheless denied elite class status because their class ranking had been fixed at birth).
This equation was turned on its head to some extent by the industrial revolution. This was the first time in history when the wealth generated by industry and trade began to dwarf the wealth generated by land ownership and agriculture on a massive and undeniable scale -- thereby wrenching power from the nobles/landowners, and placing it in the hands of newly minted industrialists. But even in the following century, it took a long while for wealth and social class to become thoroughly decoupled, and then reassembled in a different way.
What's happening now in America is that we're once again returning to a system where parentage and class beget wealth, which fixes class, which then repeats with the next generation. There are always notable exceptions to the rule, and these exceptions are held up in support of the "American Dream." But they are very clearly the exceptions. (And, in a surprising many of those rags-to-riches stories, a closer examination of the events behind the narrative often reveals that the "rags" origins were exaggerrated to varying degrees).
American conservatism is a machine for driving a wedge between the people who are trying to save this society ("liberal intellectuals", although neither word should be pejorative) and the common people of the country they are trying to save.
Who are you including under the term "liberal intellectual"? Are you including folks like Martin Feldstein (Harvard), Larry Summers (ex Harvard), Robert Rubin (Harvard BoD) and Robert Schiller (Yale)? If so, I'd argue those academia-associated liberals are every bit part of the problem. Even further-to-the-left intellectuals like Krugman have their salaries mainly funded by donations from wealthy bankers, and they offered very little criticism of the financial sector before 2008.
Go to a dive bar in Western PA, ask the people there what they think about neurosurgeons and what they think about bankers. The American conservative base hates bankers.
It may be the case that, when it comes to financial industry reforms, there's not much light between the two major parties. But what light there is is probably most clearly represented by Elizabeth Warren and the consumer protection agency for which she advocated.
Yet as soon as they took over the House, the Republican party made it a point to immediately attack her and sink her chance to lead it. So while the conservative base hates bankers, they seem also to have been conditioned to reflexively hate any kind of realistic mechanism to regulate them even more.
Unfortunately, as much as they may hate bankers (or claim to, at any rate), they hate "government" and "regulation" even more -- because that's what their banker-funded politicians have reflexively drilled into their heads. So they'll rally against regulation of the banks even if they don't understand what it's for, or that the very bankers they claim to hate benefit from their votes.
No. But the sum-up is not what makes this article good. What makes it good are the details about where the wealth comes from and what the people in the various segments are actually doing.
Pass. If you think that the state of America's economy today in any way requires violent insurrection to "rectify" then you have either a bizarrely warped sense of reality or a very unusual set of ideals.
If you would like to read a thorough argument about how fractional reserve banks and the Federal Reserve are scams, read "The Mystery of Banking" by Murray Rothbard. Google it and you will see it is available for free at mises.org.
For some reason this subject is very polarized and I get downvoted whenever I explain this. Don't downvote me just because you are uncomfortable with what I'm saying. Note that I am not ignorant. I have learned about economics. It just so happens that when trying to understand the issues myself, I have arrived conclusions that are not mainstream. But they are the correct conclusions in so far as I presently understand.